On August 14, 2003, approximately 4:15 p.m., Eastern Time, North America experienced its worst blackout ever, as 50 million people lost power in the Northeastern and Midwestern United States and in Ontario, Canada. A special task force subsequently recommended preventing a reoccurrence by making electric reliability standards mandatory and enforceable, which became a reality four years later under the supervision of the North American Electric Reliability Corporation (NERC).
NERC is an international, independent, self-regulatory, not-for-profit organization founded in 1968 to ensure the reliability of the bulk power system serving 334 million people in North America. Its electric power industry role is to develop reliability standards, enforce compliance with those standards in a fair manner, and assess monetary and non-monetary penalties for non-compliance.
Fines and Enforcement
Although NERC is also responsible to Canadian provincial regulators, the U.S. Federal Energy Regulatory Commission (FERC) has oversight of NERC and has determined under the Energy Policy Act of 2005 and FERC Order 672 that NERC is the official U.S. Electric Reliability Organization (ERO), as of July 20, 2006. It was FERC that approved 83 of the 102 proposed NERC reliability standards (the rest are still being reviewed by FERC) that became mandatory and enforceable in the U.S. in June 2007.
FERC has delegated to NERC the authority to enforce compliance through a rigorous program of monitoring, compliance enforcement and due process (including audits and investigations), and to levy penalties of up to $1 million per violation per day for non-compliance. Penalties are gauged based on mitigation efforts and the risk and severity level posed by the reliability violation.
Indeed, NERC has a “Sanction Guidelines” to govern the assessment of penalties. Investigations can arise, for example, from audits and spot checks, self-reports, and hotline reports. From June 2008 through September 2009, however, the total of NERC fines and settlements has been about $1.3 million with remedial action and non-financial penalties used more often, reflecting FERC’s goal of securing compliance, not just levying fines. As Chairman Wellinghoff stated earlier this year: “The central objective of the Commission’s enforcement program is compliance.”
Under FERC’s Enforcement Policy Statement, commitment to compliance is one of the two most important factors in determining civil penalties, with seriousness of offense the other.
The reliability enforcement scheme established by the Energy Policy Act of 2005 is complicated, involving FERC, NERC and eight regional cross-border entities ranging from the Northeast Power Coordinating Council (New England, New York, Quebec and Ontario) to the Western Electricity Coordinating Council (Rocky Mountain and Pacific states and provinces). The members of these regional entities come from all segments of the electric industry: investor-owned utilities; federal power agencies; rural electric cooperatives; state, municipal and provincial utilities; independent power producers; power marketers; and end-use customers.
Under Order 672 and NERC rules, such industry entities that have a material impact on the bulk power system must register and certify with the NERC “Compliance Registry” and are subject to NERC’s and the Regional Entities’ compliance and enforcement programs and monitoring. Entities are then categorized by function; e.g., balancing authority, distribution, generator, etc., and certain exclusions may apply.
Enforcement responsibility was new to NERC and the regional entities, and while FERC has more experience in how to conduct enforcement, NERC and the regional entities have a strong understanding of system operations. Coordination among the three is thus, essential.
Auditing and Compliance
NERC and the regional entities are required by FERC to make audit standards consistent across all regions and power systems. Industry entities that can be audited include power generators, distribution owners, transmission owners, electricity trading companies and a variety of other key energy industry players. Compliance with reliability standards covers the full range of issues involving the operation of sophisticated electric power systems, including:
• Resource and demand balancing
• Protection of critical infrastructure
• Emergency preparedness and operations
• Facilities design, construction and maintenance
• Interconnection reliability
• Personnel performance, training and qualifications
• Transmission operations and planning
NERC and the regional entities monitor compliance using regularly scheduled compliance audits, random spot checks, and investigations as warranted by indications that a standard has been violated. Since 2007, NERC has received 6,400 violation notices, with 90 percent of those self-reported by regulated entities. In contrast, NERC conducted 380 audits in 2008. Whenever a possible violation is discovered, a thorough review is conducted prior to issuing a formal notice of alleged violation to the involved user, owner, or operator.
Through the entire investigation process, NERC and the regional entities work with each user, owner, or operator to resolve any reliability issues as quickly as possible. At any time, the entity being investigated has the opportunity to settle any disputes or acknowledge the allegation and accept any associated penalties. Once an agreement has been reached and approved by NERC’s Board of Trustees Compliance Committee, the details are provided to FERC.
Penalties and Evolution
As noted, NERC has imposed civil penalties relatively lightly. Of 81 actions between June 2008 and September 2009, monetary penalties or settlements were imposed in just 24; the rest resulted in remediation with no additional payment. Many of the actions initiated involve alleged lapses in standards for communication, inspection, security and testing with regard to electric operating systems. More than half of the violation risk factors were classified as “high,” meaning they could place the bulk electric system at an unacceptable risk of instability, separation, or cascading failures.
NERC’s audit and enforcement capabilities continue to evolve. The organization is issuing an increased number of industry advisories that cover not only audit results but also updates to compliance standards in light of recent industry events. Entities covered by NERC rules should be aware of the advisory process and monitor new issuances on the NERC web site (www.nerc.com).
Moreover, NERC’s enforcement capabilities could be profoundly tested with the increasing emphasis on intermittent renewable power sources like wind and solar. The interconnection and reliability issues that renewable energy pose for the power grid are important, and regulated entities that must meet rising renewable energy standards should do so with a sharp eye on how NERC will apply reliability standards for renewable power output.
About the Author
Gregory K. Lawrence is a partner in the Energy and Derivatives Markets Group of global law firm McDermott Will & Emery, and leads the firm’s Global Renewable Energy, Emissions and New (GREEN) Products group. Mr. Lawrence focuses his practice on transactions, regulatory proceedings, negotiations, governmental affairs and agency litigation relating to the wholesale and retail electricity and natural gas industries.
